Greedman Sachs

By William Davis

“The point is, ladies and gentlemen, that greed — for lack of a better word — is good.”

We got to thinking about the mythical Gordon Gecko last month when real-life Goldman Sachs bullied a good deal of bonds from Venezuela, perhaps the world’s most easily out-negotiated counter-party. As the trade goes, the Wall Street shark paid about $865 million for $2.8 billion worth of Petróleos de Venezuela bonds due to mature in 2022 — a rather ruthless 31 cents on the dollar. Stick around pal, I’ve still got a lot to teach you.

“Greed is right. Greed works.”

Story goes that the so-called PdVSA bonds had until recently been in the possession of what passes for Venezuela’s central bank. Smooth-talking Goldman reps say the firm bought the securities from a London-based broker inexplicably named the Dinosaur Group and did not interact with the desperate Venezuelan government. Right. And Blue Horseshoe doesn’t like a 40% yield.

“Greed clarifies, cuts through, and captures the essence of the evolutionary spirit.”

Whoever the seller, folks lacking a certain kind of killer instinct have crucified Goldman for even thinking about “making a quick buck off the suffering Venezuelan people.” But blood runs cold on the Street, and the firm has already sold off a small slice of its unpalatable investment for 32.5 cents on the dollar. Why the relatively meager profit? Cuz’ Goldman’s playing the predator’s game. This early trading will only facilitate more trading in the bonds and ultimately increase prices on the rest of its position. Hey, we make the rules, pal.

“Greed, in all of its forms, has marked the upward surge of mankind.”

Then again, maybe investors will avoid holding foul-smelling debt issued by a nation in dreadful crisis altogether. Maybe Gordon was wrong. Maybe Goldman’s just one trade away from humility.

What the markets have been doing…

Lots of action across the period but little real movement. Big benchmarks like the Dow and the S&P 500 ended up pretty much where they started, while the technology-heavy NASDAQ swung a little more to the downside. (Chart watchers will note that the Composite broke below its 50-day moving average for the first time in seven months.) The tech sector’s weakness was due in large part to news that the European Union was fining Google a cool $2.7 billion for antitrust violations.

Financial stocks, meanwhile, provided a bit of a cushion to the falling tech sector. Prospects for higher interest rates boosted banks as did the Fed’s Comprehensive Capital Analysis and Review, which cleared nearly all major banks to return more capital to shareholders. As a result, several banks announced higher dividends and share repurchases.

INDEX

Friday’s Close

One-Week Point Change

Year-to-Date Change

DJIA

21349.63

-(34.65)

+ 8.03%

S&P 500

2433.15

-(9.74)

+8.24%

NASDAQ

6140.42

-(69.77)

+14.07%

Not unlike their equity counterparts, bonds made a lot of noise but didn’t wander too far from where they started. Yields on U.S. Treasuries moved little in reaction to the tightening comments from global central bank officials, while the investment-grade space moved sideways despite a nice boost from energy-related issues. The high yield market was unusually quiet as traders appeared to be somewhat cautious toward the higher-risk arena. Municipal bonds essentially tracked Treasuries as investors awaited Illinois’ budget deadline and the state’s potential downgrade to junk status.

FIXED INCOME

Period

YTD

12 Months

Yield

U.S. Treasuries

-(0.1)%

2.6%

-(0.2)%

2.1%

U.S. Investment Grade

NC

4.4%

4.2%

3.1%

U.S. High Yield

+0.2%

4.6%

12.0%

5.7%

U.S. Municipals

NC

4.1%

0.8%

2.2%

Non-U.S. Developed

NC

6.2%

-(3.5)%

0.7%

What the pundits have been saying…

“More dispersion between winners and losers creates a better environment for stock pickers. Since mid-2016, stock correlations have fallen, plummeting to their lowest level in 10 years. We expect correlations to remain relatively low, which should provide solid opportunities for active equity managers.”

Bob Doll, Chief Equity Strategist, Nuveen Asset Management

What the numbers are saying…

$2.7 billion

The amount that the European Union’s antitrust regulator fined Google for favoring its own comparison-shopping service in search results.

What people have been saying…

“There’s a lot of anxiety about where to put money to work. We know the VIX won’t stay low forever.”

— Erik Knutzen, chief ‎investment officer for multi-asset-class portfolios at Neuberger Berman, on recently trimming his exposure to assets that have soared in price.

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